EXPONENTIAL TECH INVESTOR

A Stock to Rival NVIDIA

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A Stock to Rival NVIDIA

By Jeff Brown, Editor, Exponential Tech Investor

It was February 2016… Linear vs. Exponential

I had been invited down to Exponential

Rancho Santana on the Pacific
coast of Nicaragua to speak to
a small group of wealthy in-
vestors and family offices. The
topic I discussed was a tech-
GROWTH

nology investment idea that Disruption

was safe enough for “family
money” but still offered in- Linear
credible upside.

Behind closed doors, in a small

conference room overlooking 0 TIME

the Pacific Ocean, I rose to ad- www.brownstoneresearch.com

dress the audience. I began:

I’d like to talk a little bit about exponential
technology, for context…
When you look at a typical graph, you see a
very linear progression. So if you think about
consumer electronics, how they just tend to
increase and improve 5% a year, how your
refrigerator gets 5% more energy-efficient
every year, or how automobiles improve
their fuel efficiency, that’s linear technologi-
cal progression.
Exponential’s very different. It means that
every year or every two years, it keeps dou-
bling. You get to a point where you get to
the elbow of the curve and you start to really
accelerate in terms of what the technology is
capable of doing.
To drive the point home, I showed this chart.
The point I was making is that humans are very
good at understanding linear growth, the black
line. And it’s not our fault. It’s basically pro-
grammed into our DNA. We tend to think things
will progress steadily, at more or less the same
rate, year after year.
But most of us are not capable of grasping ex-
ponential growth – the blue line. Exponential
growth sneaks up on us. It appears linear at
first, but then it reaches a sharp “elbow,” and the
trend goes nearly vertical.
In hindsight, it’s easy to spot exponential
growth.
Exponential growth is the reason why it now
costs less than $1,000 to sequence a human

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genome today when it cost $100

million in 2001.

Exponential growth in the pro-

cessing power of semiconductors
is the reason why the smartphone
in our pocket has more comput-
ing power than the systems used
to send a man to the Moon.

And exponential growth is the

reason why companies like Ap-
ple, Amazon, and Netflix have
returned thousands of percent to
investors in the span of just a few
years.

As an investor, spotting exponen-

tial growth trends is one of the
best ways to identify a truly life-changing invest-
ment opportunity. That’s what I presented on
that day in Nicaragua, the day I recommended
NVIDIA (NVDA).
NVIDIA is a semiconductor company known
today for its graphics processing units (GPUs).
NVIDIA’s GPUs are used today to run artificial
intelligence (AI) programs, among other things.
We can think of them as the “workhorse” for AI
applications in data centers today.
I’m certain readers have heard of NVIDIA. It is
now the most valuable semiconductor company
in the world. CNBC covers it almost daily. It’s reg-
ularly profiled in Bloomberg and The Wall Street
Journal. But back in 2016, when I recommended
the company, it was wildly misunderstood.
From my presentation again:
(Moore’s Law is the idea that computer process-
ing power doubles about every 18 to 24 months.)
I went on to say that Wall Street was not ac-
counting for the exponential growth we were
about to see in AI applications for data centers.
And investors did not understand that NVID-
IA’s products were perfect to accommodate this
demand.
But for investors who could appreciate expo-
nential growth, this presented an incredible
opportunity. Have a look at how NVIDIA has
performed since that day in 2016.
From February 2016 to its recent peak, NVIDIA
has returned 1,860%. For every $10,000 in-
vested, we’d end up with $186,000. That’s an
incredible return from one stock in just a few
years. And it has everything to do with under-
standing exponential growth.

NVIDIA, the company that I’m going to Now – at the right valuation – I still think
speak about, is a semiconductor company. NVIDIA is a great long-term investment. But the
And it’s governed by Moore’s Law… bulk of its exponential growth has already come

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and gone. At a certain size and scale, it gets
harder and harder to double revenues. But in
this special report, I want to share with you the
next exponential growth trend and reveal the
stock I believe could rival NVIDIA in the years
ahead.
The 5G Megatrend
The next exponential growth story that investors
need to pay attention to is fifth-generation wire-
less networks (5G).
Readers will likely be familiar with 5G by now.
I have been pounding the table on 5G for more
than three years – long before it was on the
mainstream’s radar.
5G is the next generation of wireless network
technology. For context, here’s what each wire-
less generation has enabled since 1G in 1983:
• 1G (deployed in the 1980s): Analog
cellular technology, very low bandwidth,
designed to enable mobile phone calls
• 2G (deployed in the 1990s): Digital cellu-
lar technology, digital voice phone calls,
enabled SMS (short messaging service –
sending texts)
• 3G (deployed in the 2000s): Widespread
use of CDMA (code-division multiple
access) technology, high-quality audio
for calls, early stages of low-quality video
over mobile, and internet access
• 4G (deployed in the 2010s): Significant
increase in data bandwidth, enabling
internet browsing and streaming of
high-quality video, voice over IP technol-
ogy (basically, free phone calls anywhere
in the world using services like Skype or
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any kind of messaging application)
And 5G will be a historic improvement over 4G.
Simply put, 5G will allow us to do things we
could have never done before. Here’s a snapshot
of what it will mean for consumers:
• Typical speeds on a 5G network will be 1
Gbps (gigabits per second), which is 40
times faster than what a consumer expe-
riences on average on a 4G network in the
U.S. today.
• Self-driving cars will be connected in real
time over wireless networks.
• Companies will be piloting trucks for
logistics remotely, just as drones can be
flown from halfway around the world
over satellite networks.
• We’ll be able to surf the internet and
make phone calls while riding on a high-
speed train up to 310 miles per hour (500
km/ hour).
• Consumers will be able to “sit in” on
meetings by projecting themselves using
holographic images in real time with no
video or audio delay.
• The world’s top surgeons will be able to
perform remote surgery on patients from
anywhere in the world – distance will no
longer be an inhibitor.
• And there will effectively be no latency
(delay) over 5G networks. Latency will
drop by 99% from more than 100 mil-
liseconds down to a mere millisecond.
Latency like this would enable a doctor to
operate on a patient with robotic sur-
gery… over a wireless network.
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Here’s the important point for investors. It’s
estimated that 5G will unlock up to $12.3 trillion
in wealth across a range of industries. Make no
mistake. This will be one of the best investing
trends of the decade, an exponential growth sto-
ry that only comes around once a decade.
And I’d like to share with readers the watchlist
company that will directly benefit from the ex-
ponential growth of 5G in the years ahead.
An Important Note: This company is not
currently a recommendation. As I show be-
low, the valuation does not make sense right
now.
Investors buying at these levels would be tak-
ing on too much risk and would likely end up
losing much of their investment. So let’s learn
about this company today, but my official rec-
ommendation is to wait for my buy alert.
Watchlist Company: Unity Software (U)
Founded: 2004
Headquarters: San Francisco, CA
Date of IPO: September 18, 2020
Enterprise Value: $23 billion
The Company
Unity Software provides a bleeding-edge gam-
ing engine for creating interactive 3D games
and content. We can kind of think of Unity’s
software as an operating system that developers
can build games on. Third-party developers can
use Unity to build immersive games for mobile
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phones, tablets, personal computers, gaming
consoles, augmented reality (AR) devices, and
virtual reality (VR) devices.
It’s natural to wonder what the connection is be-
tween 5G wireless technology and the software
that Unity develops.
And the answer is that mobile gaming rep-
resents about 45% of the overall gaming market.
It is already an incredible $68.5 billion global
market. Almost 2.5 billion people play games on
their mobile devices. And the total gaming mar-
ket will reach about $200 billion by 2022.
For perspective, the gaming market is much
larger than the entire motion picture industry,
which is estimated to be about a $103 billion
market.
And with the rise of 5G and even faster wireless
internet speeds – combined with even more
immersive, social, and engaging gaming expe-
riences – we are going to see gaming absolutely
explode in the coming years.
Today, the gaming industry is nothing like it was
a decade ago. The industry used to be built on
gaming consoles plugged into TVs or software
that ran on our computers.
The consoles connected to the big cathode-ray
tube (CRT) TVs, and they had very little memory
and computer processing power. The PC games
may have had a little more juice, but they were
still limited to a very small market.
Under those circumstances, gaming just wasn’t
something that would move the needle from
an investment standpoint. But that all changed
with fourth-generation wireless technology (4G).
4G, combined with advanced smartphones,
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made sophisticated mobile games possible, and
that brought gaming to the masses for the first
time in history.
Now, instead of needing to hook up a bulky
console to a TV, consumers could simply down-
load a free app on their smartphones. Then they
could play their favorite games from anywhere,
anytime they wanted.
As a result, gaming went from a niche industry
to a mass market.
Think about this – back in 2011, less than 26%
of Americans played games on their mobile
phones. Fast forward to today, and nearly 64%
of Americans play games on their smartphones
at least once per month. Gaming has seen an
incredible surge.
This explosion in demand opened the door for
Unity Software to become a dominant player in
the space. After all, why would a gaming com-
pany spend millions of dollars creating a new
gaming engine for its next game when it can
simply license the industry’s best engine from
Unity and build on top of it?
And that’s the brilliance of Unity’s business
model.
Producing individual games can be a hit-or-miss
effort for gaming companies. It’s almost like the
movie business. Some titles do great, and oth-
ers are flops. Unity chose to focus on building
the platform on which games can be built. That
means that no matter what happens, Unity wins.
In this way, Unity Software is a “picks and shov-
els” play on the gaming industry.
For those companies interested in its platform,
Unity offers a tiered pricing model. The most
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basic level costs $399 per person, per year. The
mid-tier level costs $1,800 per person, per year.
And the high-end level costs $200 per person,
per month (with a 20 person minimum).
Where Unity’s business model really kicks in is
when a game developer generates $100,000 or
more in revenue, which is not much at all, from
a game. Once that happens, the developer must
pay for a “Pro” version license to Unity for every
person in their company.
On the next page is a visual of what these tiers
provide.
And in what I see as a very shrewd move, Unity
allows students and individuals limited access to
its platform for free. By allowing aspiring de-
velopers to experiment with its gaming engine,
Unity sows the seeds of future demand. What a
great model.
So Unity can thank 4G for the tremendous suc-
cess it has had over the last decade.
But when it comes to real-time, social, lag-free
gaming, 4G has a glaring weakness. The per-
formance is not good enough to power massive
multiplayer experiences. Yet that’s the direction
the gaming industry is going today.
5G Will Send Gaming Revenues
Soaring Higher
I suspect many readers may not be familiar with
a game called Roblox. It’s an online game for
kids that looks like a throwback from 20 years
ago. It’s simple, and the graphics are not at all
lifelike. They are blocky and cartoonish.
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Roblox Graphics
Source: Roblox
While it may not look like much, Roblox is
incredibly “sticky.” In fact, it is one of the most
popular games in history. It’s a massively mul-
tiplayer online game (MMO) that features many
large, open worlds. Players create an avatar to
wander around these worlds, interacting with
the landscape and fighting cartoon monsters
and opponents along the way.
But most importantly, players go to the worlds
to hang out with each other. Roblox has become
a social place for kids to meet up and chat. They
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can “friend” each other inside the game. And
they talk to each other over wireless headsets.
So Roblox is really a social environment for kids
where real friendships are formed. And existing
friends connect online after school or in the eve-
ning. That’s why it is so sticky.
In fact, the game now boasts over 150 million
active monthly users. That’s a lot of people run-
ning around a virtual world together.
The beauty of these MMO games is that players
are free to organize their own events inside the
virtual world. Famous rapper Travis Scott did
just that during the COVID-19 lockdowns back
in April.
Scott organized a massive concert inside Fort-
nite, which is another incredibly popular mul-
tiplayer game. Fortnite now boasts over 350
million registered users around the world.
And each of those 350 million people had the
opportunity to see Scott perform inside the vir-
tual world. It was quite the performance…
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Travis Scott in Fortnite
Source: Riot Games via Polygon
Not only did Travis Scott have a digital repre-
sentation of himself jumping around and per-
forming, but the concert also featured creative
special effects.
Lightning storms happened in the background,
backup dancers appeared to be made of fire,
and the show even inverted gravity at one point.
Players suddenly flipped upside down and start-
ed floating.
And get this – 27.7 million players showed up
to watch this concert. That makes it the largest
concert in history by a wide margin.
If we compare this to traditional venues, most
outdoor stadiums hold less than 100,000 peo-
ple. Indoor arenas hold even less.
Then, if we compare this to the top televised
sporting events – the Stanley Cup got 5.4 mil-
lion viewers last year. And the World Series got
an average of 13.9 million viewers. Travis Scott’s
virtual concert beat both combined.
The writing is on the wall… This is the future
of entertainment. And it won’t just be concerts.
Soon we’ll be able to experience all our favorite
events inside a virtual world.
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But not with 4G.
4G doesn’t have the speed, bandwidth, or laten-
cy to support a mobile game in which there are
thousands or even millions of people moving
around and interacting at the same time.
Even if consumers can access an MMO over 4G,
the experience will not be good. The content
won’t be smooth. Instead, it will come across
as jittery. And players will experience latency
when they try to perform an action themselves
– gamers call this lag. There will be a delay
between pressing the button and the associated
action happening on the screen.
To avoid this poor experience today, users must
play popular multiplayer games using fixed
broadband internet. That likely means from a
stationary personal computer with a wired inter-
net connection.
And that’s precisely why 5G is set to amplify
gaming revenues. 5G is going to unlock full
functionality for the world’s top multiplayer
games on mobile phones and tablets from pret-
ty much anywhere. No need to be tethered to a
desk with a fixed, wired internet connection.
That will drive the adoption of games like Ro-
blox and Fortnite. And it will also create a dy-
namic where we will see all kinds of live events,
like Travis Scott’s concert, move to a virtual
world.
Concerts, movie premieres, Broadway theatre,
and even live sporting events will eventually be
viewable from within a virtual environment sim-
ilar to these games. And it’s all thanks to 5G.
Because Unity is far and away the industry’s top
mobile gaming engine, we can be sure that it
will see exponential growth in the years to come.
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Unity Software is the perfect 5G play on the
gaming industry.
Wait for the Magic Window to
Open
That said, I cannot recommend Unity Software
at current levels.
The company just went public on September 18
at $52 per share, valuing the company at $13.7
billion. The stock has since rocketed up to over
$91 per share, giving Unity Software an enter-
prise value of $23 billion.
But if we look at Unity’s financials, it only gen-
erated $541 million in revenue last year. This
calendar year’s forecast is for $737 million in
revenue.
Using the forecast for this year, Unity is current-
ly trading at an enterprise value-to-sales (EV/
sales) of nearly 32.75.
That’s a valuation equivalent to almost 33 years
of sales, not profits. For perspective, some of the
world’s top software companies today are trad-
ing at an EV/sales of just over 10. While Unity’s
valuation isn’t as ridiculous as some others in
the market, it is still vulnerable to a major pull-
back on the slightest disappointment in forward
guidance.
Investors buying Unity Software today are pret-
ty much guaranteed to lose money in the short
term. And I use such strong language because
the insiders – the venture capitalists (VC) who
invested in Unity Software when it was a private
company – are legally restricted from selling any
shares until March 2021.
That’s the lock-up period, and it comes standard
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with every initial public offering (IPO).
Once the lock-up period expires next March, the
VCs will be scrambling to sell and capture their
massive profits. The earliest VCs who invested
back in 2011, when Unity was valued at $150
million, stand to make over 15,000% on their
investment. We can be sure they will do so.
And that means we will see Unity’s share price
fall significantly in the weeks leading up to its
lock-up expiration date in March. And it will
likely continue to fall in the weeks following
lock-up expiration.
That’s when it will be time to strike.
While I can’t recommend Unity Software to-
day, I can tell you that this company will make
a fantastic investment once investors can buy
into this story at a reasonable valuation. That’s
something I will be watching closely early next
year.
Regards,
Jeff Brown
Editor, Exponential Tech Investor
P.S. Anyone who missed my "Beyond Exponential"
investment summit can click right here or on the
image below to watch a replay... and discover how
you can build a million-dollar tech portfolio – from
scratch – in today’s market.
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